Global Central Bankers Say Tighter Policy Is a Long Way Off

By Scott Hamilton and Simon Kennedy -
Jun 25, 2013

Global central bankers led by
Federal Reserve officials said they are still a long way off
from tightening monetary policy, seeking to calm investors
unnerved by the Fed’s push toward curtailing bond-buying.

The comments, along with efforts by the People’s Bank of
China to allay concern over a cash crunch, helped halt a slide
in stocks after the Fed’s June 19 decision to outline a
timetable for tapering quantitative easing. Bank of England
Governor Mervyn King and European Central Bank Executive Board
member Benoit Coeure today echoed Fed counterparts in saying
policy will stay loose to safeguard economic expansion.

“Clearly the level of interest rates and the scale of
asset purchases will have to be unwound and we must return to
more normal conditions at some point,” King told lawmakers in
London. “That point is not today.”

Also speaking in London, Coeure said euro-region economic
growth will probably remain “weak” this year and there should
be “no doubts that our ‘exit’ is distant.” In a speech in
Berlin, ECB President Mario Draghi said the euro-area economy’s
condition “still warrants an accommodative stance.”

The Europeans’ comments come a day after two regional Fed
presidents emphasized that U.S. policy remains accommodative.
Chairman Ben S. Bernanke last week said the Fed may start
slowing the pace of bond buying later this year and end it
entirely around mid-2014 if the economy gets on a path of
sustainable growth. The Standard & Poor’s 500 Index (SPX) fell 1.2
percent yesterday.

“The bottom line is that they’re driving home the point
that there’s no exit yet,” said Marc Chandler, chief currency
strategist at Brown Brothers Harriman & Co. in New York. “Many
economies can ill-afford higher interest rates.”

China Crunch

China’s central bank said today it will keep money-market
rates at a “reasonable” level amid a cash squeeze which last
week sent the nation’s overnight repurchase rate to a record.

The People’s Bank of China has provided liquidity to some
financial institutions to stabilize money market rates and will
use short-term liquidity operations and standing lending
facility tools to ensure steady markets, according to a
statement today. It also called on commercial banks to improve
their liquidity management.

U.S. stocks rose, with the S&P 500 advancing 0.6 percent.
In Europe, the Stoxx Europe 600 Index increased 1.4 percent.
Stocks were also boosted by U.S. consumer confidence and new-home sales data that exceeded economists’ forecasts.

King Defense

Richard Fisher, president of the Federal Reserve Bank of
Dallas and a critic of the Fed’s easing policies, said yesterday
that officials are talking about a “dialing back,” not an
exit. Minneapolis Fed President Narayana Kocherlakota, who has
called for easier policy, said the Fed must emphasize in its
statement that policy will remain accommodative “for a
considerable time” after the end of quantitative easing.

Their comments highlight the challenges the Fed confronts
while seeking to lay out a strategy for curtailing the asset
purchases that have pushed its balance sheet to a record $3.47
trillion. Neither Fisher nor Kocherlakota votes on policy this
year, though they will vote in 2014.

Bernanke last week emphasized that decisions to alter the
pace of asset purchases depend on the economy’s performance, and
that the Fed has “no deterministic or fixed plan” to end them.

Bernanke Defended

Fisher yesterday backed Bernanke’s message, saying he
favors tapering the purchases if the economy makes the kind of
progress officials forecast. King also defended the Fed chief,
saying markets overreacted to his comments.

“Even in the U.S., what you’ve seen there is that they’re
still providing more stimulus,” King said. “The rate at which
they’re providing more stimulus may be about to suddenly taper,
but they’re still providing more stimulus.”

King, who has been defeated in a push for more QE since
February, also said that while recent data show that a U.K.
recovery “is in sight,” it’s “too weak to be satisfactory.”

“We saw the developments in the last week or so in
China,” King said. “These are really quite significant
developments. The euro area still remains a tremendous problem.
Until we know how these problems will work out, it seems
impossible for us to judge the speed and the timing by which we
may eventually get back to a more normal state.”

BOE policy maker Martin Weale agreed with King on the
outlook for policy, saying the “process of unwinding
quantitative easing is some way in the future.”

King’s cautious outlook came as he made his last appearance
at the U.K. Parliament’s Treasury Select Committee before he
retires at the end of the month. He will be replaced by Mark Carney on July 1.

Negative Rates

Separately, the TSC published a paper by the BOE on
negative interest rates, which it requested after the Monetary
Policy Committee discussed the possibility of further rate cuts
earlier this year.

In the paper, the BOE said while a negative rate remains an
option, QE and credit-boosting programs are “more reliable
tools for stimulating aggregate demand.” The benchmark interest
rate has been at a record-low 0.5 percent since March 2009,
while the BOE has bought 375 billion pounds ($579 billion) of
government bonds since then.

It added that a cut in its benchmark rate remains an option
that the MPC “will keep under review lest circumstances change
in the future.”